Treasury Yields 3 Basis Points From 2011 Low Before Homes Data

Treasury yields were three basis points away from the year’s low before a report forecast to show U.S. housing starts near recession levels, adding to concern about the recovery and boosting demand for the safety of bonds.

The Federal Reserve will today buy $5 billion to $7 billion of notes as part of its $600 billion purchase program to cap borrowing costs and shore up the economy. Demand for government debt was also bolstered as traders reduced their prediction for inflation to a three-month low, which would help preserve the purchasing power of bonds’ fixed income.

“There has definitely been some flight to safety,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “We are at critical junctures all around, particularly at the long end of the curve.”

The 10-year note yielded 3.16 percent as of 8:41 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent security maturing in May 2021 slipped 2/32, or 63 cents per $1,000 face amount, to 99 23/32. The benchmark yield declined to 3.13 percent on May 13, the lowest since Dec. 8.

Treasury 30-year yields fell one basis point to 4.28 percent. Monument’s Ostwald called 4.25 percent, a level last reached on Dec. 7, “a very critical level” for 30-year yields.

‘Stagnant’ Housing

U.S. builders began work on 569,000 houses at an annual rate last month, compared with 549,000 in March, a Bloomberg survey showed before today’s Commerce Department report. Starts averaged 1.72 million a year in the decade before the recession began in December 2007.

The National Association of Home Builders/Wells Fargo sentiment index held at 16 this month, the Washington-based group reported yesterday. The 10-year average was 42.

“The U.S. housing market is unlikely to recover to pre-recession levels in one or two years, and will probably be stagnant for a longer period,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co. “Ten-year yields are expected to stay in the lower end of a 3-4 percent range,” he said.

The Fed plans to purchase Treasuries due from May 2015 to November 2016 today, according to its website. The central bank is scheduled to complete its purchase program by June.

Futures on the Chicago Board of Trade show a 15 percent chance the Fed will raise its target lending rate by December, down from a 29 percent probability a month ago. Chairman Ben S. Bernanke said last month he’s in no rush to increase rates, and he will keep reinvesting proceeds of maturing debt held by the central bank into bonds.

Inflation Outlook

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, fell as low as 2.31 percentage points today, the narrowest since Feb. 18.

Inflation-linked Treasuries have handed investors a loss of 0.1 percent in May, headed for the first monthly loss this year, according to an index compiled by Bank of America Merrill Lynch.

Treasury bill rates were near record lows after Treasury Secretary Timothy F. Geithner said yesterday he had taken action to stave off the federal debt limit until Aug. 2.

Geithner wrote lawmakers to say he has declared a “debt issuance suspension period,” a technical measure that allows him to free up borrowing room from two retirement funds. Republicans are seeking spending cuts and no tax increases in exchange for lifting the $14.3 trillion debt limit.

Bill Yields

Six-month rates were at 0.07 percent, compared with the record low 0.0305 percent set on May 6. Three-month bill rates were at 0.02 percent, almost the lowest level since they went negative during the financial crisis.

“In the very short term it’s actually a positive for the Treasuries market because limiting volumes of supply means there’s less to go around,” said Ostwald in a telephone interview. “But it doesn’t mean we aren’t pushing yield levels to a level at which everyone says this has got stupid and we have a short sharp sell-off.”

Demand for Treasuries was tempered amid speculation exports will bolster a U.S. recovery.

Industrial production rose for a sixth month in April, gaining 0.4 percent, a Bloomberg survey showed before the Fed report today. Demand for cars, chemicals and industrial machinery helped drive up U.S. exports in March to a record.

“It’s a good time to sell” Treasuries, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-biggest bank by market value. “Exports are strong, led by growth in the developing countries.”

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